Unemployment

An Economic Analysis

K. G. Knight

• Publisher: Routledge
• Year: 2018
• ISBN:
  9780429750465
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

First published in 1987. Unemployment is currently the major economic concern in developed economies. This book provides a comprehensive analysis of the economics of unemployment. It concentrates on theories of the labour market and examines the critical inter-relationships with the rest of the economy. It provides a thorough evaluation of theory and extensive consideration of the relevant empirical evidence. It emphasises the multi-causal nature of unemployment and concludes that policy-makers should respond with a multi-faceted mix of policies.

Chapter One

UNEMPLOYMENT – COSTS AND MEASUREMENT

Introduction

In the early sixties, academic interest in unemployment from both a theoretical and empirical point of view was at a low ebb. Students were still acquainted with the major theoretical debates of the thirties and forties but the low unemployment levels of the post-war period had convinced much of the economics profession that Keynesian demand management had provided the solution to the problem of unemployment in the industrial economies. In the US where unemployment remained comparatively high, there was a debate about current problems. The issue at stake was whether the unemployment that remained was structural and required specific and partly supply side remedies or cyclical and remediable by a major expansion in aggregate demand. (1) In the UK there remained the vestigial problem of relatively high unemployment in certain regions which generated a rather low key debate on causes and remedies. (2)

Since that time unemployment in most industrial economies has increased significantly. Nowhere has this upward trend been more pronounced than in Britain. Not surprisingly this has led to a major revival of interest in the economics of unemployment. At the theoretical level the reappraisal of Keynesian ideas begun by Clower (1965) and Leijonhufvud (1968) and the re-emergence of interest in classical ideas (3) have led the way. Empirical work and interest in the appropriate policy response to high unemployment has also greatly increased. The gloomy forecasts of continuing and ever worsening high unemployment in the 1980s have reinforced this revival of intellectual interest in the subject.

In later chapters we will review these theoretical developments and consider relevant empirical evidence mostly for Britain but for other economies where relevant. In chapter nine alternative policy approaches to high unemployment will be considered. In this and the next chapter the basic facts of unemployment will be considered with emphasis being given to the labour market aspects of high unemployment.

The Stock of Unemployment – Measurement

From a theoretical point of view the stock of unemployment in an economy at a particular moment in time is most easily defined as

where

U_t = numbers unemployed
L_t = total labour force
E_t = numbers employed

or in percentage terms by dividing through by L_t.

From a practical point of view the measurement of 1.1 or 1.2 presents a great many problems. In Britain the basic method of measurement of U_t has traditionally been the monthly count of these registered unemployed at Employment and Careers offices and which appeared in the Department of Employment Gazette.

However since 1982 there has been a change to a count of unemployed on a claimant basis and figures for 1984 are shown in Row 1 of Table 1.1. This involves counting those who claim benefit at Unemployment Benefit offices. There are a number of problems with this measure. Firstly it fails to take account of those who are registered as unemployed but are not eligible or choose not to apply for benefit. The stock of unemployment calculated on the old (registration) basis is a higher total than on the new (claimant) basis. It has been calculated that to compare 1984 figures with those for say, 1980, on a registration basis involves the addition of 287,000 workers. (4) This is done in Table 1.1 in Row 2. Secondly, the new like the old method of counting the unemployed fails to take account of workers out of work and seeking a job and hence economically active but who do not register as unemployed. The most important groups are (a) individuals who leave their job voluntarily or who have been dismissed for industrial misconduct, (b) the self-employed, (c) those who are not eligible for benefit and choose not to register, especially married women who retain the option not to pay the full national insurance contribution, (5) (d) other groups including those regarded as unavailable for work by the Department of Employment. The solution to this problem of the downward bias of the monthly count is to conduct a labour market survey to assess the extent of unregistered unemployment (as in the US) and to base the unemployment count upon this survey. Alternatively use can be made of regular surveys like the Labour Force and General Household Surveys in Britain to provide additional information or of a Census of Population which ask questions about the availability and willingness to work of those currently unemployed. Both of the latter two options are done in Britain and this gives us some idea of the degree of under-estimation of the currently published figures. The surveys give slightly differing answers and the figures used in Table 1.1 employ a weighted average of the evidence from these three sources (LFS, GHS and Census). These show that in 1981 unregistered unemployment was 9.9% of the claimant total for men and much higher (44.9%) for women. Applying these proportions to the total unemployed (on a claimant basis) gives the estimate of unregistered unemployment in Row 3 of Table 1.1. (6) Data published by the Department of Employment (1983) shows that as a proportion of the total unemployed, unregistered unemployment (especially for women) has fallen in the last decade. Mainly this reflects the greater propensity of women to register as unemployed and claim benefits because of changes in national insurance contributions and benefit entitlement which have altered the position of women. However, there are also a growing number of workers (especially women) who are discouraged from entering the labour force because of the depressed labour market conditions of the last decade. (7) Since these individuals are willing to work at current real wages and job conditions but are deterred from doing so by the prospects of unsuccessful job search, they should be added to the total of those unemployed. In a more buoyant labour market this group of workers would be economically active and appear generally in the stock of unregistered unemployed. Metcalf (1984) has recently estimated this group to contain between 240,000 and 281,000 workers. In Table 1.1. (Row 4) the mean of Metcalf’s estimates is used to calculate the 1984 total of actual unemployment in Britain.

Table 1.1 Claimant Unemployed and Actual Unemployment (in thousands) 1984

Source: Department of Employment Gazette August 1984, June 1983. D. Metcalf ‘On the measurement of employment and unemployment’ National Institute Economic Review, August 1984.
Notes: Unemployment is seasonally adjusted (for May 1984) and includes school leavers.

Note that the inclusion of discouraged workers in the unemployment total follows from the emphasis on the willingness to work. Government administrators in Britain have traditionally emphasised availability for work. As a result they ignore unregistered and discouraged workers and also attempt (8) to reduce the true measure of unemployment further by excluding those who are registered and claiming benefit but are discouraged from actively seeking work because of the high probability of failure. In 1983 according to the Labour Force Survey this group consisted of 149,000 unemployed men and 37,000 unemployed women. This attempt to reduce unemployment is unacceptable if we are also concerned with the willingness to work. If we aim to estimate the effects and extent of true labour market slack (excess supply) clearly discouraged workers (not claiming) should be added to the total of claimants and discouraged workers who are claiming benefit should not be deducted.

However, the stock of claimants does include groups of workers who are not available for work and these should be excluded from the total. An important group is of those older (largely male) workers who have retired before the statutory retirement age and signed on at unemployment benefit offices to secure national insurance credits. As a result of a measure in the 1983 Budget this is no longer necessary for men aged over 60. Moreover as a result of a second change in that Budget a man aged 60 or over is eligible for the higher (long term) rate of supplementary benefit if he drops out of the labour force. The number involved is quite large (150,000). However, they are already excluded from the 1984 figure so no adjustment is required in Table 1.1. However, some adjustment would need to be made to Table 1.2 to claimant data before 1983 to ensure compatibility with 1984. The simplest way to do this is to add 150,000 to the time series data shown in Table 1.2 for years 1983 and 1984 (and to Row 1 of Table 1.1 to get the claimant stock on a comparable basis).

There are also some other claimants not available for work who should be excluded. The 1983 Labour Force Survey shows that those who did not want to work for family or other reasons amounted to 6.1% of the claimant total. These are deducted from the total of claimants and non-claimants in Table 1.2. Also deducted are those non-claimant groups who are searching for work but not currently unemployed. They consist mainly of students in full time education and those currently on government training schemes who are seeking work. They are a pretty substantial group (230,000) according to the estimates published by the Department of Employment (1984). They are excluded from the total of unemployed workers because they are not currently unemployed and are equivalent to those in employment who are also looking for a new job.

The exclusion of this group in Table 1.1 is contentious. Some estimates of actual unemployment in Britain include all of those currently in education and those covered by special employment and training measures. This is on the grounds that in the absence of these measures the individuals would be claiming benefit. According to Metcalf (1984) the Department of Employment states that the claimant count is reduced by 440,000 as a consequence of these measures. The major objection to the inclusion of this number in Table 1.1 is that to do so would also justify the inclusion in the total actually unemployed of large numbers of other individuals who would also be without jobs ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Contents
• Acknowledgements
• Chapter 1: Unemployment – Costs and Measurement
• Chapter 2: Stocks, Flows, Duration and the Incidence of Unemployment
• Chapter 3: Search, Unemployment and Unfilled Vacancies
• Chapter 4: Macroeconomics of Unemployment – The Classical Approach
• Chapter 5: Macroeconomics of Unemployment – The Non-Market Clearing Approach
• Chapter 6: Non-Natural Unemployment – Empirical Evidence
• Chapter 7: The Natural Rate of Unemployment: The Supply Side
• Chapter 8: The Natural Rate of Unemployment: The Demand Side
• Chapter 9: Unemployment – Policy and Prospects
• Bibliography
• Index